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STRATEGY FOCUS
Prepared by Merrill Lynch & Co.
Global Securities Research & Economics Group
The equity, currency and financial markets have recently been showing a heightened level of concern surrounding the Asian economic scenario. Commodities, however, have been reflecting these fears for some time. Pessimism about Asian demand prospects has served to send copper prices, for example, to their lowest levels in 10 months despite continuing buoyancy in North American demand and a modest improvement in European offtake. Chinese demand, on the other hand, has fallen significantly below expectations and the prospects for 1998 have been increasingly downgraded. The picture in Japan is also bleak. GDP in Japan showed a growth rate of only 0.6 percent in the second quarter on a year-over-year basis. The recent currency crisis among the so called “Asian Tigers” such as Thailand and Indonesia has added to the unsettled economic climate in the region. Slower growth prospects might be anticipated for the entire region and in the area of base metals Asia is a crucial factor. London Metals Specialist, Ted Arnold, pointed out the importance of Asia in the September 18 Commodity Market trends report with this table which speaks for itself.
Share Of Asia In W. World
Metals' Consumption In 1996 (%)
Other Total Japan Asia Asia Copper 13.8 19.8 33.6 Aluminum 14.4 15.7 30.1 Nickel 22.2 15.3 37.5 Zinc 11.6 20.1 31.7 Lead 6.5 18.4 24.9 Stainless Steel 18.2 21.7 39.9
And this does not include Chinese members. Economic growth has also slowed there and their current inventory levels are probably more than ample. For years, China has been the savior of base metals as they came in as substantial buyers on price breaks. That was the big hope for base metals bulls in the second half of 1998 but China has essentially been absent as a major buyer and Chinese imports of both copper and aluminum are down substantially this year. The official Chinese Agency CNIEC has forecast that second half of 1997 copper imports from the west will be only 70,000 tonnes and Chinese imports of aluminum during the first seven months of 1997 fell 86,000 tonnes to only 92,000.
These details are symptomatic of what be expected in other commodities that are dependent on Asian demand. Cotton for example is an economically sensitive market, and like base metals it is highly dependent on Asian demand with China being a big player. Cotton prices have been depressed by the Asian outlook despite a positive supply/demand outlook outside of Asia including some El Nino related crop concerns. To put it simply, the Asian economic scenario is bearish for commodities as a whole as it portends slower economic growth not only in Asia but with potential consequent GDP reductions in North America, South and Central America and Europe. Among the other sectors that might suffer are energy and grains. In crude oil, Senior Energy Analyst Michael Rothman has reduced projected global demand by 200,000 barrels per day as a result. All this adds to our long running view that there are few if any inflationary implications currently in place for the commodity arena and current global growth prospects should keep commodity prices in check well into 1998.
One market that has been showing a bit of life recently is silver which hit a two- week high of $5.02. A potential tightness scenario has been an ongoing focus of silver traders as COMEX stocks have dropped to a twelve-year low of just over 129 million ounces from over 220 million at the beginning of the year. In addition, silver appeared to get a boost from Kodak's recent restructuring on speculation that these moves might have some impact on their commitment to digital imaging technology. Digital imaging cuts into silver's photographic offtake. However, in our view these concerns are premature. Digital imaging has been slower to mature than many thought but the development and research from Kodak and others is likely to continue. In any case, this is a longer-term (post 2000) factor and should not have a material impact on silver consumption for a number of years. Our view is that while silver prices could move somewhat higher, perhaps to the 5.25 area, a major rally remains unlikely. And we see lower prices in 1998.
(Reprinted by permission. Copyright © 1997, Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
November 13, 1997William O'Neill
Merrill Lynch & Co.
Global Securities Research & Economics Group
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